The CBD Program and the Energy Performance of Offices Down Under

From a one page fact sheet on my research in Australia:

Lane Burt was awarded the 2014 Fulbright Scholar Grant in Climate Change and Clean Energy, and as a result spent the first half of 2015 in Melbourne, Australia working with ClimateWorks Australia to identify the effects of the national Commercial Building Disclosure (CBD) program. The conclusions that follow are drawn from the context of the regulatory structure and real estate market in Australia.

Key Takeaways on Benchmarking:

The availability of energy benchmarks is having an impact on the commercial real estate market, in all tiers. The NABERS program results are compelling: the average improvement for a base building benchmarked multiple times is 8.6%, and between 300 and 400 ratings are produced quarterly.

The CBD program’s reliance on base building ratings (only owner controlled areas, no tenant spaces) has advantages and disadvantages.

Disadvantage: The energy savings resulting from the program, in individual buildings and in aggregate, must be considered in the appropriate context. A reduction in the energy use of a base building is a fractional reduction of the total building energy use. Energy use in tenant spaces (and general tenant engagement) is still a challenge, and base building only ratings may be improved by shifting loads to the tenant. That does not mean sector wide energy savings will not result from the program, but it does mean such savings cannot be directly measured from the program results.

Advantage: Base building ratings are more predictable than whole building ratings because they are less susceptible to forces outside the owner’s (or designer’s) control. Tenant activity will not jeopardize a rating and the benefits of the rating, so owners can pursue them confidently. This stability has repercussions throughout the supply chain for services, as engineers and other service providers are starting to guarantee base building ratings during design (or redesign). Such confidence reinforces the market’s expectation of the energy performance of an office building.

While there is no connection between Green Star (like LEED) and NABERS (like Energy Star Portfolio Manager), the expectation in the market that Green Star buildings will be at least 5 Star NABERS is very strong. This becomes something of a self-fulfilling prophecy. Credit for this success is shared between the designers and operators.

Below the top tier of the real estate market where Green Star is strong, the CBD may be establishing expectations of moderate and improving performance. Some NABERS assessors say that building owners who receive low ratings do care, and do take measures (generally metering and controls) to improve to a mid-performance level (ex. 3 out of 6 stars), because that is where they perceive the market expects them to be. Will this hypothesis be confirmed by the program data in forthcoming years?

It is not possible to identify a single cause of the change in market expectations for the energy performance of top-tier and mid-tier commercial office buildings. Certainly the availability of NABERS ratings in advertising and the CBD time-of-sale-or-lease requirement has had a large impact, but there are also complementary policies that can also claim impact. For example:

  • The Property Council of Australia included the attainment of 5 star NABERS and 5 star Green Star ratings in its guidelines for determining Premium and Class A real estate classification (and 4 starts for Class B). This may have formalized existing expectations or enabled shifting expectations, particularly in mid-tier real estate.
  • IPD developed the Australian Green Property Investment Index in 2011, which has repeatedly demonstrated that Green Star and NABERS-rated buildings financially outperform non-rated buildings, especially at the upper end of ratings performance.

The requirement triggers for CBD (at time of sale or lease) result in different growth trends in the dataset of building benchmarks, as well as the vintages of the benchmarks. In the four years of CBD program implementation there are now 1500+ buildings with multiple ratings. This subset of the larger dataset is the most interesting. Buildings receive multiple ratings at the rate they are sold or leased in Australia, as opposed to the second year of mandatory benchmarking in many U.S. cities. This structural difference may portend a different rate of change of the ratings over time in the Australian program than in most U.S. programs.

What to Do With This Information?

A less volatile/more predictable assessment of base building energy use may benefit U.S. programs by enabling the type of performance guarantees that are beginning to happen in Australia. Perhaps the authorization for EPA and DOE to create Tenant Star rating for tenant spaces also provides the opportunity to assess base buildings in a complementary fashion, and consistent with the whole building ratings currently produced by Portfolio Manager. It is not clear that the public disclosure of base building ratings would be necessary to attain the benefits of their existence.

Energy ratings should make their way into more transactional decisions in real estate, perhaps through leasing/procurement criteria or real estate classification. BOMA provides general, non-specific guidance on Class A, B, and C office space but does not publish specific criteria. Potentially, cities (or CoStar) could use the data collected as part of local benchmarking programs to suggest energy rating ranges for local premium real estate. This may be more feasible if a base building assessment were available to avoid misleading perceptions of inefficiency in some buildings with demanding tenants or space uses.

Better metrics could be developed to identify how susceptible a building’s energy performance is to tenant behavior in the absence of base building/tenant space ratings.

What research would be required into the financial performance of rated buildings in the U.S. to enable the development of a green property index similar to the Australian index? Certainly such an index would be impactful, and perhaps better information on the performance of base buildings and tenant spaces would provide additional, usable context for investors.